Why was IR35 introduced?

The role of IR35 in the drive for a fair tax system

by The Startups Team

Updated: Oct 3, 2013 Published: Jun 20, 2001

The first part of the legislation, affecting National Insurance only, was in fact passed through parliament at the end of 1999, though even this part did not kick in until the rest was made law. In fact the Lords initially threw out the enabling Bill, but had it thrown straight back by the Commons and was forced to let it through.

The rest of the legislation, particularly that dealing with taxation, was enacted with the Finance Bill in the 2000 spring Budget.

The government’s intention, of course, was to stamp out fraud and abuse of the tax system. Paymaster general Dawn Primarolo claimed that there had been a recent increase in people “side-stepping the tax and national insurance rules” by setting up one-person companies.

She said: “We don’t think that’s fair to other employees who have to pay more as a result.”

Ms Primarolo added that the government did not want to stop people working through service companies where a flexible supply of skilled manpower was essential to a client. “But the tax and NI they pay should not be vastly different whether they choose to operate through a service company or as an individual.”

She said that one of the groups campaigning against the change claims its members earn an average of £45 an hour – or £1,800 a week. “Yet they can pay no national insurance contributions at all; less than a nurse, a teacher or a self-employed plumber.”

Ms Primarolo added: “I have no sympathy for those who have been profiting unfairly from the present arrangements and whose complaint is simply that they don’t want to pay their fair share of tax.”

The government also denied that it has not consulted business about the changes. It said the HMRC sent out 18,000 copies of the proposals and held two consultative meetings attended by 38 representative bodies. The government received over 1,700 comments.

Not surprisingly, those most affected by the rules were furious. The Institution of Analysts and Programmers (IAP) said the new law was “disastrous” and should be scrapped. A spokesman said: “The majority of people in IT will just put their rates up to cover the tax so that the employers will pay more. It’s just transferring from one heap to another.” He added that the measures would polarise direct contractors, between the better off and the poorly paid.

A spokesman for the Institute of Chartered Accountants of England and Wales (ICAEW) said the final opportunities to make changes to the new rules were past. “The only hope will be to scrap it,” he said. The spokesman added that many areas of the legislation were far from clear cut. “There are going to be a lot of people who see their tax situation radically altered.”